Chief economist at Coinbase Institute explains “recent decline in crypto markets”
On Tuesday (July 5), Cesare Fracassi, chief economist at the Coinbase Institute, explained the “recent decline in crypto markets” in a research report entitled “Coinbase Institute Research: Crypto Prices and Market Efficiency”.
Fracassis’ report, published earlier today on the Coinbase blog, began by saying that “over the last eight months, the market value of all cryptocurrencies has gone from a peak of $ 2.9T to a current level of less than $ 1T, a decrease by more than two thirds. “
He went on to say that “examining the crypto markets based on an understanding of market efficiency can help us interpret the data.”
Fracassi noted that crypto is currently behaving very similarly to technology stocks:
“In particular, cryptocurrencies today share similar risk profiles as oil prices and technology stocks. Beta is a typical measure of the systematic risk of financial assets. A beta of zero means that the asset is uncorrelated with the market. A beta of one means that the asset moves with the market.
“A beta of two means that when the stock market rises or falls by 1%, the asset increases or decreases by 2%. The animation below shows that the betas for bitcoin and ethereum have jumped from 0 in 2019, to 1 in 2020–2021, and to 2 today – they are now very similar in risk profile as a more traditional asset, technology stocks.“
He then pointed out that while it is clear that the Fed’s tightening of monetary policy has hurt the prices of both technology stocks and cryptocurrencies, we can not say that 100% of the decline in cryptocurrencies is due to the deteriorating macro environment:
“It may be useful to assess how much of the current downturn is due to deteriorating macroeconomic conditions, as opposed to deteriorating the outlook specifically for cryptocurrencies, especially given that the crypto market value fell above 57% so far this year in 2022. It is worth noting that during the same period the S&P 500 fell 19%, and if macroeconomic conditions were the only reason for the decline, we would have expected that cryptocurrencies, with a beta of 2, would fall by around 38%.
“So we can roughly estimate it two-thirds of the recent decline in cryptocurrencies can be attributed to macro factors, and one-third to a weakening of the outlook exclusively for cryptocurrencies. This is similar to what happened during the dot-com recession of 2000–2001, when the S&P 500 fell 29%, and Nasdaq’s composite index (consisting largely of technology stocks), with a beta of 1.25, fell 70% from top to bottom. bottom. .“
Finally, Fracassi noted that the “market efficiency view” can not predict “the direction of cryptocurrencies in the future”, and concluded his blog post by saying that “according to the market efficiency view of crypto markets, only changes in the outlook for the crypto industry relative to what is already expected will result in changes in prices. “
